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When is local manufacturing right for hardware startups?

/ December 13, 2016 by Nathan Donato-Weinstein

Local manufacturing is a hot topic these days. So it’s no surprise it took center stage at a recent convening of the Silicon Valley Manufacturing Roundtable held at Samsung Semiconductor USA in North San Jose.

From left: Tim Holmes, Shirish Joshi, Mike Keer, Robert de Neve

As moderator, I had a chance to engage with four emerging players in the local hardware scene: Type A Machines, Kaptivo, BriteLab and Product Realization Group. The punch line? The dynamics fueling this hardware renaissance are as transformative as the digital revolution that preceded it. Each story below explains why.

Tim Holmes is something of a renaissance man. He’s been an Apple evangelist, a coffee entrepreneur, and most recently, the founder of Type A Machines, a 3D printer startup focused on enterprise customers. Holmes is quick to point out that the product itself isn’t revolutionary: “We are 1 of 700 companies that make 3D printers,” he said. What interests him is the business model that underlies 3D printers – specifically, the ability to fulfill orders locally, sustainably, and without overproduction. While Type A first tried doing manufacturing in-house, the company quickly discovered it was more efficient to work with a contract manufacturer (CM). His partnership with BriteLab (see below) is as much about collaboration and strategy as it is about supply-chain management. He also acknowledges that after years of instant gratification — think quick-hit app development — both VCs and entrepreneurs may need to adjust expectations when it comes to returns in the slower-percolating hardwareindustry.

Shirish Joshi is also a veteran entrepreneur, and his latest smart whiteboard startup, Kaptivo, just shipped its first product. The company designs and
manufactures an accessory that turns any whiteboard into a “smart” board, recording the pen strokes and sending them to a mobile app for playback later. Kaptivo has benefitted from new funding models such as Kickstarter, which allowed for proof of concept, leading to additional VC investment. However, he cautions young entrepreneurs that there are “many small steps involved in running a successful business – it takes time and experience.” For this reason, stories like the Pebble acquisition by Fitbit – announced in early December — are “inevitable, and not necessarily a bad thing.” He agrees that finding the right CM is more art than science. “Your product must fit into the portfolio of your partner.”

Mike Keer started his career in “big hardware” and now helps smaller companies to scale through his consulting business, Product Realization Group. His focus is on concept-to-market execution, which includes supply-chain management, financing and manufacturing strategy to move from early stage to scale. Keer’s advice to hardware startups is to “treat your CM as an investor in your company,” complete with a well-thought-out pitch covering everything from team dynamics to “realistic expectations on timing.” Keer is bullish on the Internet of Things (IoT), noting that “hardware products without software won’t garner much investment.” Regarding intellectual property (IP), Keer recommends integrating unique features into the product that can’t be easily replicated, because “your product will get copied, regardless.”

Robert de Neve, CEO of BriteLab, is a contract manufacturer with an enviable list of clients including Tesla. Startups inside his facility – which includes a full suite of business and design services – include the high-tech skateboard company OneWheel and “personal avatar” maker Anybots. Despite the market seeing some “successes and setbacks” in 2016, he believes that we are experiencing a “new golden age of hardware.” While de Neve acknowledges that IoT has generated excitement for a younger batch of entrepreneurs, he also notes that building things is hard, requiring a balance of skills and manufacturing know-how. “It’s difficult to be innovative and to execute at the same time,” he said. The decision about where things are made often comes from financial partners, says de Neve. “The fresher the intellectual property, the closer it (manufacturing) needs to be” to avoid IP diffusion (read: theft). “The best scenario is that the design engineers and the manufacturing engineers are together under one roof.” De Neve suggested using the total cost of ownership (TCO) model as a way to factor things like travel, freight, and IP diffusion costs into the unit cost for production.

All four experts engaged in a healthy discussion about the complicated calculus of deciding when a product has scaled to the point that it needs to go overseas. While there is no magic number, there are characteristics that favor local manufacturing including more complex advanced machines, and products that change more quickly.